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A day after I wrote my opinion piece on business-standard.com on why the draft Gold Monetisation Scheme will not deliver, the government notified the draft Sovereign Gold Bond Scheme on June 18. I had argued that the scheme would not deliver in practice and, instead, might potentially make the fisc/exchequer take a hit of trillions of rupees, and might end up being fiscally overwhelming and way too disruptive in my column on April 17. Paradoxically, the risk to the exchequer would be directly proportional to the extent of success of sovereign gold bond scheme, if short gold exposure is not hedged, and no reduction in gold imports, if it is hedged.
The notified draft Sovereign Gold Bond Scheme seems to have taken a far more modest, cautious and defensive stance in aiming to issue sovereign gold bonds worth Rs 13,500 crore equivalent to only 50 tonne at current gold prices. But the cost benefit trade-off of even this apparently modest unhedged short gold exposure of Rs 13,500 crore is overwhelmingly adverse. This is because if gold price were to rise from the current level of $1180 per ounce to $1920 per ounce (a level last reached in September 2011) due potentially to monetary stimulus via quantitative easing in the Eurozone and Japan, the potential fiscal liability will increase, not counting the interest, from Rs 13,500 crore at the time of issuance of gold bonds to Rs 22,275 crore at maturity. This translates into a fiscal hit of Rs 8,775 crore. If we assume that the bonds have maturit y of five years, then the interest amount at 2% per annum comes to no insignificant a sum of Rs 1,350 crore and which, when added to the potential fiscal hit of Rs 8,775 crore, stacks up to Rs 10,125 crore (75 % of the original Rs 13,500 crore ) and all this for reducing gold imports by a measly 50 tonne, just 3.75 % of last fiscal year's imports of 1,332 tonne.
The author is former executive director, Reserve Bank of India
